Paycheck Withholding: A Con on Taxpayers

About a month ago, I wrote a column criticizing politicians for giving the government more power over the accounting practices of private industry.

That's because when it comes to "cooking the books," as they say, our elected leaders are regular Bobby Flays.

That column triggered a pretty overwhelming response. Yes, respondents wrote, we agree. The U.S. government -- and Congress in particular -- have been manipulating the federal budget and growing the size of government for years. But what can we do about it?

That's a tough question. "Write your congressman" rings hollow. Lots of offices on Capitol Hill still aren't receiving mail. And besides, what power might one letter have against 40 years of expanding federal hegemony?

But over the last month, I've been reading an unsettling, but important book, Dependent on D.C.: The Rise of Federal Control Over the Lives of Ordinary Americans, by Charlotte Twight, an economics professor at Boise State University. Twight documents in grand detail how over the past several decades, politicians have used gradualism, special interests and outright deception to create a state of dependency between American citizens and their government. The book will at once fascinate and infuriate you.

It was while reading Twight's book that I stumbled onto an answer to the "what can we do?" question. It seems to me that the most productive and immediate step we can take toward holding government accountable is to end the federal government’s ability to withhold income taxes from our paychecks.

Think about what withholding does for a moment.

Instead of writing a fat check to the federal government every spring -- a check that would naturally cause you to pause and think about whether you were getting a proper return on your investment -- you're given a "refund"on money the government's already taken from you. For a sizeable lot of Americans, late April and early May bring not headaches and paperwork, but fanciful thoughts of vacations, a new TV or, at least, a night out for dinner.

That's a pretty nifty trick the government's pulled. Because that "refund" you get really isn't a refund at all. It was your money all along. The government took more money from you then was needed, used the excess to collect interest, and then returned it to you, almost certainly at a value less than when you earned it. And yet you're elated when you get it!

Withholding tips the scales against the taxpayers, and in favor of government.

It takes government out of the nasty business of collecting income taxes and imposes that burden on private employers. Why should American businesses be forced to do the accounting and paperwork necessary to keep the U.S. government operating?

Withholding not only makes it easier for the government to collect taxes, it makes it easier for politicians to raise them. That's because you never see the money that's withheld from your paycheck. You never need to notice that gaping wound in your bank account once your tax check has cleared. What's more, tax increases are spread out over 24 paychecks, which softens the blow to taxpayers, making tax hikes more politically palatable.

In her book, Twight delves deep into congressional testimony, newspaper articles and federal records to document how our current withholding system was passed into law, known as the 1943 Current Tax Payment Act.

Proponents of the act showed no bounds in soliciting public support for withholding.

Politicians and U.S. Treasury officials tapped into American patriotism, imploring taxpayers that a bit of sacrifice at home paled in comparison to the sacrifice "our boys" were showing on the battlefields of Europe and the Pacific.

Americans were further assuaged with an alleged one-year "tax forgiveness plan" as the new system was phased in to replace the old one. That plan proved to be statistically dubious. Twight even documents federal Treasury officials referring to it as "a paper forgiveness." The columnist Amity Shlaes, writing for The Wall Street Journal, called it "the most ambitious bait-and-switch plan in America's history."

Withholding proponents also neglected to tell Americans that they would actually be losing money through the withholding plan. That's because the same amount of money taken from a paycheck in January is worth far less than it will be when tax season rolls around 15 months later. The value of money increases over time. In effect, the withholding act was a tax increase, sold to the American public as a tool of convenience.

The federal withholding power was passed with much public manipulation and chicanery, and at a time when America was at war -- and consequently most beholden to and trustful of its elected officials and its government.

Today, the federal government grows wildly out of control. Congress spends well beyond its means, then merely "readjusts" figures -- i.e. borrows from Social Security or shifts figures from one fiscal year to the next -- to compensate. But because Americans are taxed before they ever see the full amount of what they've earned, we remain largely ambivalent about -- or even amused by -- the antics of our elected leaders.

What better way to bring government back into account then to require each taxpaying American to sit down on April 15 and write one massive check to cover his tax burden? Each of us then would have no choice but to evaluate our government's performance, to gauge whether what we're getting is worth what we're paying.

It wouldn't be all that difficult politically. A repeal of the 1943 law would take only a majority of both houses of Congress, and a signature from President Bush. Granted, there would be a bureaucratic logjam as the U.S. Treasury and the IRS struggle to convert from a withholding system to a pay-once-a-year system. Collection would be much more difficult. You'd probably get more tax evaders. More bounced checks. Lots of people would fail to properly save for tax season.

But collecting taxes should be difficult. And it should be done by the government that spends them, not by private employers. When tax collection is easy, spending tax dollars becomes easier, too. And government grows.

A few prominent politicians have already showed some interest in the injustice of withholding. Others could be persuaded. If we're serious about holding our federal government accountable, about limiting its growth, about streamlining its excesses, I can't think of a more significant or productive first step than to end federal income tax withholding.

Radley Balko is a writer living in Arlington, Va. He also maintains a weblog at www.theagitator.com.